NBU Head Kyrylo Shevchenko urges the government not to rely on hryvnia emission

The government’s intention to use hryvnia emission as the main source of financing the state budget deficit could lead to disaster. This was stated by Head of the National Bank of Ukraine Kyrylo Shevchenko in a column on the Ekonomichna Pravda website.

The head of the National Bank of Ukraine (NBU) thinks that at the beginning of the large-scale invasion, the decision to monetize the state budget deficit by the National Bank was justified, but now the prolonged use of this mechanism threatens the stability of the economy.

"Money printing is characterized by high efficiency and the ability to reduce the pressure of military spending on the population and business in the short term. But monetization is not the approach that will allow the economy to remain stable for a long time. This is a solution that saves time, but does not solve the problems of the economy and the state budget. In order to minimize negative economic and social consequences of the war, it is necessary to use other methods of optimizing state finances," believes Kyrylo Shevchenko.

According to the head of the National Bank, despite these threats, the government is increasingly relying on money emission by the National Bank, which has gradually become the main source of financing the budget deficit.

"Despite gradual adaptation of the economy to wartime conditions, the need for emission financing is chronically increasing: In March, UAH 20 billion turned into UAH 50 billion separately in April and May, and in June monetization was carried out by UAH 105 billion," continues the head of the country's financial regulator.

According to him, each new turn of the ‘money printing’ only intensifies dollarization of the economy and withdrawal of savings from the financial system.

"The longer this trend persists, the more pressure will be on the exchange rate and international reserves, and the confidence in the government, the hryvnia and the National Bank will gradually be lost. The greater the spread of negative expectations, the faster the prices will rise," says Kyrylo Shevchenko.

As one of the possible steps to stabilize the financial system, the head of the National Bank proposes to the government to sequester the budget.

"There is a need to reduce expenses by sequestering the budget, reducing non-critical expenses, which partly the government is already doing. The alternative should be understood: if monetization continues, the inflation-devaluation spiral will not allow prioritization of budget expenditures, government expenditures will depreciate in real terms, making it impossible to achieve the goals set. In addition, incomes should be increased. A higher tax burden on business and employees is not an optimal choice. Business needs to recover," explains the head of the NBU.

Kyrylo Shevchenko also stresses that the government’s demands threaten the independence of the NBU and Ukraine’s European integration prospects.

"Any European country applying for EU membership has to also meet the so-called ‘Copenhagen criteria’, which require a candidate country to meet certain requirements. The criteria contain clear rules calling for, among other things, independence of central banks in member states, prohibition of direct financing of the public sector by central banks, prohibition of privileged access of the public sector to financial institutions. Failure to meet these requirements may hinder European integration or prolong the process of Ukraine’s accession to the EU for decades," concludes Kyrylo Shevchenko.

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